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Today's high gas prices have many roots

WASHINGTON—You're at the gas pump, fuming about $2.25 or more for a gallon of regular unleaded. Who's getting rich off you, how'd prices get so high, who's to blame?

Not your local convenience store, where three-quarters of Americans buy their gas. Shop owners make a penny or two per gallon. Their bonanza is inside the store, not at the pumps. They're feeling your pain because Americans are spending on gas what they used to spend on Snickers bars or Slurpees.

The most obvious villains are the giant oil companies and rich oil countries such as Saudi Arabia. But they're just two pieces of a complicated answer to why the price at the pump is so high.

Other villains include, in no particular order: you, environmentalists, the weak dollar, government regulators, Wall Street investors, China and other developing nations. All played a role in creating today's high gas prices.

For starters, many major metropolitan areas have passed laws requiring special summer blends of fuel that are less likely to evaporate in hot months and cause smog. These special blends generally are introduced about now, in early spring, and trigger price increases of roughly 30 cents a gallon during the warmer months in many parts of the country.

"This is the average we have seen every year since 2000, and it is exactly what we have seen so far this year," said Jeff Lenard, a spokesman for the National Association of Convenience Stores in Alexandria, Va.

The biggest reason pump prices have risen is the surging global price of crude oil, which is refined into gasoline. Crude oil prices are set on international markets, where price generally is determined by old-fashioned supply and demand. When a product is in short supply, people are willing to pay more for it.

Oil isn't a finished product but a commodity. That adds a wrinkle to the supply-and-demand explanation. It's traded in contracts for future delivery, and these contracts are bought and sold like stocks.

Also like stocks, the perception of risk can be as much a factor as the underlying supply-demand fundamentals in determining the value of oil. Some buyers of oil contracts are users of oil or gas who seek to lock in prices now out of concern that they might rise later. Others are investors who trade in oil as speculators, trying to guess a trend they can get rich from.

Oil prices are being driven up by investors who think the price will go higher in the future. In many cases, they might be acting for you.

"The oil market, believe it or not, is being fueled by your pension fund," said Philip K. Verleger, a noted oil economist in Aspen, Colo. "For more than a decade, investment bankers have been advising pension funds to put 10 percent or 11 percent of their assets into commodities."

The New York Mercantile Exchange last month reported an all-time high in trading for crude oil-futures contracts. Regulators said noncommercial traders, pension funds and the more speculative hedge funds accounted for 34 percent of the contracts last month.

Then there's you, the consumer. Gas-guzzling SUVs help make the United States the world's largest consumer of oil, at 21 million barrels a day. Americans will consume 1.7 percent more gasoline this year than last despite the higher prices, the Energy Information Administration estimated Thursday. It's the analytical arm of the Energy Department.

India and China also are stretching supplies, as fast-developing nations. China is on course to equal today's U.S. consumption of oil by 2020. While the United States imports oil mainly to power vehicles, China imports it to power industry. China's industrial growth, in great measure, is tied to the strong U.S. economy that buys its exports. American consumers pay China's oil bills.

"We're the ones buying the goods from China. It is driving their increased demand for energy," said John Giglio, an oil expert and the executive director of the National Association of State Energy Officials in Alexandria, Va.

Meanwhile, the supply of oil, industry analysts said, is growing at only 2 percent a year. Refineries are running at 90 percent capacity or more. There's no margin for error.

"There is no cushion in the market to absorb any unexpected changes in supply and demand," said Guy Caruso, the head of the Energy Information Administration. Saudi Arabia reportedly pledged this week to pump oil up to the limits of its matchless production capacity in an effort to calm market nerves, but so far markets haven't much reacted.

A single event—such as a strategically placed bomb in Iraq or Saudi Arabia, or sabotage at a U.S. refinery—could spark global shortages.

"We're used to an oil market that if Iraq goes down or Nigeria goes down, Saudi Arabia and other producers can cover it. We don't have that anymore," said Rick Mueller, an analyst at Energy Security Analysis Inc. in Wakefield, Mass.

The potential for scarcity drives up the price of oil.

The weak U.S. dollar is another reason that gasoline costs more. Oil is traded in dollars, and the dollar has lost 15 to 20 percent against most major currencies. Oil companies and producing nations have raised prices to compensate for the dollar's slump.

Your loss at the pumps is the gain of oil-rich nations and global oil giants.

Big oil companies posted record profits last year and should grow even flusher this year. Oil companies will occupy three of the top 10 spots when Fortune magazine releases its ranking of the top 500 publicly traded companies Monday.

Exxon Mobil Corp. ranks second, behind only Wal-Mart. Exxon posted sales nearing $221 billion in 2004, a figure roughly equivalent to the economy of Greece. Fortune ranked it the most profitable company on its list, with $21.5 billion in profits, a staggering figure larger than the economies of Madagascar and Iceland combined.

ChevronTexaco Corp. and ConocoPhillips ranked 7th and 8th, respectively. ChevronTexaco saw its net income—or profit—jump to $13.3 billion in 2004, almost twice its 2003 take.

Oil-producing countries also get rich, by requiring the oil companies to cut them in on the deal. Norway, the world's third largest oil exporter, is thought to have the world's highest standard of living, thanks to oil income. Booming oil prices brought Norway a 19 percent increase in oil exports last year, to $38 billion.


(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050407 GASPRICES

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